Short-Term Bullish Patterns Battle Long-term Downtrends
There are a lot of short-term consolidation patterns out there, but these come with some big caveats. First and foremost, the broad market environment remains bearish and most ETFs are in long-term downtrends. Second, the bounce over the last five weeks is still deemed a counter-trend advance within a bigger downtrend. Third, many of these bounces retraced one to two thirds of the prior decline and this puts them in a potential reversal zone.
The following charts for SPY and IWM show the battle zones for large-caps and small-caps. Small-caps are lagging overall, but perked up a bit on Friday. Large-caps are leading, but stalled the last ten days. Tuesday’s low marks short-term support for both and this low should be watched closely going forward.
A Two Week Consolidation for SPY
SPY, which acts as the base case for this counter-trend bounce, retraced around 50% of the prior decline. The ETF first touched the 50% retracement line (~280) on April 9th (10 days ago) and has since danced around 280. This 10-day dance is a consolidation after a sharp advance. Even though I cannot draw a nice looking pennant or flag, a consolidation after a sharp advance is typically a bullish continuation pattern. Thus, the siren song of the 200-day SMA could be calling and draw SPY towards the 300 level.
So, the bulls have the short-term edge as long as SPY hold support. The ETF established short-term support at 270 with lows on April 13th and April 21st (Tuesday). The ETF was hit hard on the Monday-Tuesday decline, but managed to recover the last three days. It would now take a 5% decline to break support at 270. Chartists can also watch RSI(10) for a move below 50 to signal a downturn in momentum.
IWM: Rising Wedge versus Pennant Breakout
The Russell 2000 ETF (IWM) also highlights the competing forces in the stock market right now. The ETF is trading well below its falling 200-day SMA and in a long-term downtrend, but the short-term trend is up as the ETF bounces the last five weeks. The rising wedge defines this bounce with Tuesday’s low marking support. A break here would reverse the wedge and signal a continuation of the bigger downtrend…and then the Fed will step in.
A pennant formed within this wedge and IWM broke out of the pennant on Friday. This keeps the short-term uptrend alive, but I am hesitant to even mark bullish patterns when the bigger trend is down. Why? Because they are more prone to failure when the bigger trend is down. The indicator window shows RSI hovering in the 50-60 zone, which acts as momentum resistance. The first two breaks below 50 did not break the upswing, but perhaps the third will.
Overall, most ETFs are in a sort of no-man’s land. The bigger trends are down, the short-term trends are up and they are near potential reversal zone (38-62 percent retracements). The short-term edge is with the bulls as long as short-term support levels hold. In fact, Tuesday’s low marks support for many ETFs. Short-term support breaks could signal the end of this counter-trend bounce and a resumption of the bigger downtrend.
This Week at TrendInvestorPro
Friday commentary: I updated the market timing models with several indicator charts. Spoiler alert: the broad market environment remains bearish. I also featured a timing strategy using three %Above 50-day EMA indicators. The Fed balance sheet continued its record expansion and I compared it to the 2008 period. Three equal-weight sectors are lagging (Finance, Industrials and Consumer Discretionary) and nine of the 11 sectors are below their 200-day SMAs.
Thursday Commentary: I dated the core ETFs. There are just a few clear uptrends and lots of counter-trend bounces. Some are strong (XLV, SKYY) and some are weak (IWM, KRE). IBB broke out of a five year consolidation, GDX broke out of a seven month consolidation and GLD is headed towards its 2011 highs. I also grouped the ETFs according to their retracements with the strongest at the top and weakest at the bottom.
Tuesday Commentary: I revisited the Weighted Average Stochastic Score (WASS) and proposed a simplified version: a 5-day SMA of the 125-day Stochastic based on closing prices. Both were backtested using 44 ETFs. Using closing prices instead of intraday highs and lows reduces volatility in the Stochastic Oscillator and weeds out errant spikes. As such, I was able to use a 5-day SMA for smoothing, in place of a 20-day SMA for WASS. This reduces lag and makes the indicator more response.